Latest US and euro zone economic data seem to move on divergent paths. But, the depth of the US slowdown and its spillovers to Europe and other economies warrants close monitoring. Mainland's export growth in the first two months eased sharply to 16.8% yoy, from 25.7% in 2007, because of a stagnant US market. We keep our view that Hong Kong's total export growth for 2008 will be at single digit level.

On the domestic front, Hong Kong's February retail sales growth eased to 9.5% largely because of the seasonal effect of the Lunar New Year festival. However, taking January and February data together, retail sales surged 16.4%, driven by strong domestic demand. Retail sales are likely to stay robust in the near term, as consumer confidence is underpinned by rising wages and good employment prospects.

The unemployment rate fell to a 10-year low of 3.3% in February. But there seems to be little room for the rate to fall further, as the drop in the February unemployment rate was driven by a bigger decline in the labour force rather than job growth.

The trade sector was the first sector to feel the pain of waning global demand and has been lacklustre in adding new jobs for months. The heightened risk in the global credit market has been weighing on local stock market may soon impair worker demand, particularly in the financial sector.

Inflation figure is also of concern. February CPI inflation jumped to 6.3% yoy, from 3.2% in the previous month. However, the CPI reading was distorted by a number of one-off factors, including the waiver of rentals for different types of public housing in February 2007 and 2008, and property rates concessions for this year. Even taking out these one-off factors, the underlying inflation remained strong at 5.1%, as food prices continued to accelerate.

Despite the apparent surge, we expect inflation to reverse its uptrend in the near term as food supply gradually readjusts and food demand drops after the Lunar New Year festival. Moreover, if the economy starts to cool, job market will get less tight and wage pressure is likely to ease. The government's property rates concessions and electricity subsidies will also help. We therefore maintain our forecast of a relative mild inflation rate of 3.2% for the full-year of 2008.

Retail Sales Eased after Lunar New Year Festival

After surging 23.2% in January, Hong Kong's retail sales growth eased to 9.5% in February. The high volatility was largely because of the timing of the Lunar New Year, after which consumers tend to decrease their spending. The festival was on 18 February last year whereas it came earlier on 7 February this year. Taking January and February data together, retail sales rose considerably by 16.4% yoy.

Strong local demand remained the key driver, as reflected in the robust demand for consumer durables, which soared 12.7%, after rising 22.8% in January. Sales of jewellery and luxury items also marked a double-digit growth of 11.8% even after a large increase of 30.3% in the previous month.

Retail sales are likely to stay robust in the near term, as consumer confidence is underpinned by rising wages and good employment prospects. Hong Kong's February unemployment rate fell to a 10-year low of 3.3%. But there seems to be little room for the rate to fall further, as the drop in the unemployment rate was driven by a bigger decline in the labour force rather than job growth.

Although retail sales growth may decelerate gradually in line with the slower momentum of the economy, rising number of tourists will hopefully continue to lend support to the retail sector. For the year as a whole, we maintain our forecast of a 14.7% growth in retail sales.

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Hong Kong Economic Monitor (April, 2008). Hang Seng Bank Limited. All rights reserved. Reproduction of article(s) in whole or in part is permitted provided the source is quoted. Please direct any inquiry to Treasury, Planning and Research Department, G.P.O. Box 2985, Hong Kong.